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Challenging Practical Features of Bitcoin by the Main Altcoins Andy Spurr1 and Marcel Ausloos1,2,3

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Challenging Practical Features of Bitcoin by the Main Altcoins Andy Spurr1 and Marcel Ausloos1,2,3 Challenging Practical Features of Bitcoin by the Main Altcoins Andy Spurr1 and Marcel Ausloos1,2,3 1School of Business, University of Leicester, Brookfield, Leicester LE2 1RQ, UK 2Department of Statistics and Econometrics, Bucharest University of Economic Studies, 6 Piata Romana, 1st district, 010374 Bucharest, Romania 3 GRAPES, Sart Tilman, B‑4031 Liege, Belgium Abstract We study the fundamental differences that separate: Litecoin; Bitcoin Gold; Bitcoin Cash; Ethereum; and Zcash from Bitcoin, and draw analysis to how these features are appreciated by the market, to ultimately make an inference as to how future successful cryptocurrencies may behave. We use Google Trend data, as well as price, volume and market capitalization data sourced from coinmarketcap.com to support this analysis. We find that Litecoin’s shorter block times offer benefits in commerce, but drawbacks in the mining process through orphaned blocks. Zcash holds a niche use for anonymous transactions, benefitting areas of the world lacking in economic freedom. Bitcoin Cash suffers from centralization in the mining process, while the greater decentralization of Bitcoin Gold has generally left it to stagnate. Ether’s greater functionality offers the greatest threat to Bitcoin’s dominance in the market. A coin that incorporates several of these features can be technically better than Bitcoin, but the first-to- market advantage of Bitcoin should keep its dominant position in the market. Keywords: Cryptocurrencies, Bitcoin, Blockchain, Altcoins, Investor attention, Google search volume index, centralization 1 Introduction Much of the cryptocurrency market is focused on the supremacy of coins themselves, with less focus on the technical aspects that are the underlying factors for this success. Our motivation for this paper is to focus on these technical aspects, since the development of new coins, and improvements on existing coins benefit from this type of research. Using “scholarly” methodology, we attempt to gauge how the market values such features. We thereby perform a Qualitative analysis for a “better cryptocurrency choice” - although the final choice depends on the user’s own criteria, of course. Concluding this paper, we make predictions as to which existing features are likely to be successful as this market continues to develop. The cryptocurrency market has exploded in recent years, becoming an industry worth USD 470 bn (Coinmarketcap.com, 2018). Bitcoin (BTC) was the first currency of its kind; other alternative cryptocurrencies, ‘altcoins’, have since been created in an attempt to improve upon the way that their transaction value is digitally sent and received. The key innovation that can be attributed to Bitcoin’s rapid success is the use of the blockchain technology, but this is challenged (Chatterjee et al., 2018). The blockchain forms a competitive environment by which users known as ‘miners’ validate transactions in order to receive a reward – the issuance of new coins. Miners commit their computing power to the network in an attempt to crack a complex mathematical puzzle, that once solved, allows a block of transactions to occur (Nakamoto, 2008). This is known as proof of work. The use of this puzzle prevents a single user from consistently being able to create blocks on the blockchain, preventing them from acting maliciously, by validating their own false transaction. On the contrary, miners are incentivized to remain honest, as these honest miners are eligible for the reward of coins. This distributed system of verification allows for a scenario whereby all users can form a consensus of trust, eliminating the need for a central authority to provide the role of overseer. A user that wishes to cheat the system by creating a faulty blockchain would have to have access to more than 50% of the network’s total computing power - which is a staggering amount (Hruska, 2017). Since coins are introduced by the system itself, they can be traced across accounts to their inception, allowing all users to trust the integrity of a given transaction. The use of a block prevents these accounts from performing double-spends, since all transactions within a block are checked to be simultaneously valid. A Bitcoin address consists of a public key (shown on the blockchain) and a corresponding private key (Bitzuma.com, 2018). Public key cryptography is used to combine these two values in order to create an unforgeable message signature. These keys are linked through a signature algorithm, which is known by the network. The BTC network is pseudonymous, meaning that the addresses of wallets (public keys) are visible to all, since they are noted on the blockchain, which is public knowledge. The value of each transaction is known, but their respective owners are hidden. This has led many to Question the morality of the network, since users can perform illicit activities under the protection of the anonymity that the network provides (Chen, 2016). The network currently supports a system by which transacting users can offer a transaction fee in order to increase the likelihood that their transactions are included into an upcoming block. This transaction fee is rewarded to the miner that cracks the block’s puzzle, on top of the newly created coins. Currently, transaction fees only account for 1% of mining revenue (Blockchain.info, 2018). Once the final Bitcoins have been issued, miners are likely to compete for transaction fees, as opposed to newly created coins. One should notice that the Bitcoin protocol is merely a set of mathematical rules and code, which does not offer an individual anymore control than needed for an “average user”. Nevertheless, this offers a problem to the flexibility of the network to change; this is overcome through a process known as a ‘fork’. A fork is basically a software change, by which users change their protocol so that it matches that of other users. This makes changes to the Bitcoin network a matter of “democratic vote”, whence is purely optional. In Sect. 2, we provide a literature review on a reduced scale. Much information is, one should say obviously per se, in such an electronic world, obtained from the web. One could also say that most of the literature pertains to papers delivered at conferences, thus through conference proceedings. Remaining at a scholar level, we do our best to refer to papers which have undergone peer to peer review procedures. The research Questions are next outlined in Sect. 3, before the methodology in Sect. 4. The ”data” gathering is explained in Sect. 5, presenting the distinctive features of these six cryptocurrencies. A section, Sect. 6, on results with some discussion on Qualitative and Quantitative aspects follows. A conclusion section, Sect. 7, ends our report. 2 Literature review Bohme et al. (2015) argue that Bitcoin is not completely decentralized, due to certain barriers-to-entry within the necessary functions of the network. Bohme et al. (2015) find that exchanges are not decentralized, since they are subject to legislation from the nation in which they operate, which effectively prevents a free market for this service. Exchanges in the USA must register with the Financial Crimes Enforcement Network, which require the payment of a license fee that can be up to six figures in value, whilst exchanges in Germany are required to have a minimum capital requirement of EUR 5 million. These significant capital requirements prevent the average person from setting up an exchange, leading to imperfect competition within this sector. de Filippi and Loveluck (2016) consider the governance structure within the Bitcoin network and find that it is not completely decentralized. A Question still raised by Chohan (2019). Recently, Manavi et al. (2020) proved that the ”myth”, for the Bitcoin-based networks, i.e. decentralization is only true in specific regions, i.e., it is not distributed homogeneously. In fact, Shaw and Hill (2014) had suggested that the governance of Bitcoin relies on leaders, forming oligarchic organizations, thus ”centralized”. Hruska (2014) questions the decentralization of the Bitcoin mining process, as mining ‘pools’ have formed by which users pool their computing power in order to distribute mining rewards evenly across users, allowing for more consistent income from the mining process. Some of these pools offer this service in exchange for voting rights, which can allow these pools to have heavy influences on decisions such as voting on forks. This acts to centralize the network, since it increases the influence that a single voter might have on decisions. Eyal et al. (2016) study the impact of changing the block size and block times, and find that, although changes to this can increase the scale by which the network can handle transactions, these changes come at the cost of greater centralization. They find that fairness suffers, as any increase in the rate at which work is done benefits those with the capital to respond to such changes, while restricting users that cannot meet the increased demands in storage and processing speed. Barber et al. (2012) find that the capped supply of Bitcoin will likely lead to an interesting scenario by which any appreciation in the currency’s value will translate directly into an appreciation of the coin’s price, as opposed to fiat currencies that are continuously printed, giving them an outlet for this growth. The main drivers of the Bitcoin price can be studied in many ways, as through a “Wavelet Coherence Analysis’ (Kristoufek, 2015). Ammous (2018) studies the trends in currency printing, and finds that over the next 25 years, the supply of USD will likely increase by 372%, with GBP supply increasing even greater, at 530%. When compared to Bitcoin’s 27% increase in the same period, the use of BTC as a store of value may be extremely appealing (Ammous, 2018), as it does not suffer the same loss in purchasing power as other fiat currencies.
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